The program helps eliminate what can be a significant barrier for small businesses seeking to contract with federal, state, and local government entities. This means they can take advantage of opportunities that would otherwise be unavailable to them.
Bonds backed by SBA have three parties involved: the bonded contractor (the “principal”), the bonding company (“surety”), and the project owner (the “obligee”). Each party has its role to play in settling claims.
Why Do Contractors Need to Purchase Bid and Payment/Performance Bonds?
Bid bonds are typically required on public projects to establish that the bidder can execute the contract per specifications and pay for liquidated damages if awarded the project. Performance and payment bonds, on the other hand, guarantee that a contractor will perform and pay subcontractors and suppliers for materials and labor under the terms of the contract.
While bid and performance bonds cover different aspects of a project, sureties underwrite both similarly. In general, sureties will want to see that the bonded contractor has experience on a similar size and type of project and has the financial strength to complete the work.
The program is a little more expensive than securing the same bond without it (the SBA charges 0.6% of the contract bond amount). However, consider that businesses that cannot secure a surety bond are effectively barred from doing business and may not be able to reopen in the future.
What Are the Benefits of the SBA Surety Bond Guarantee Program?
The SBA’s SBG Program encourages surety bond companies to write contract bonds for small and emerging contractors that would not qualify for such bonds in the standard marketplace. The SBA guarantees up to 90% of any losses sustained by the surety for a fee, significantly reducing their risk and encouraging them to issue these bonds.
The bonded contractor called the principal on a contract bond, must provide internally prepared financial statements to the surety every six months. These are reviewed by the bonding company and the obligee (the private or government project owner requiring the bond).
The SBA benefits construction, service, and supply businesses with insufficient working capital to qualify for contract bonds in the standard market. In such cases, a contractor could obtain a contract bond backed by the SBA that is 20 times larger than their working capital, which allows them to pursue large projects. However, this short-term solution should be considered only once the company can improve enough to qualify for a traditional contract bond.
What is the SBA Surety Bond Guarantee Program?
The Small Business Administration’s Surety Bond Guarantee Program is an excellent resource for contractors to obtain contract surety bonds. This program guarantees 80 to 90 percent of a surety company’s losses on bonds executed for eligible small businesses that cannot obtain the necessary bonding under standard commercial or private surety markets.
The program partners with approved surety companies to help small businesses qualify for contract bonds.
The claims process may involve a claim audit to verify losses incurred. If a claim is valid, the obligee can request the principal to repay the surety for amounts expended, settling the claim.
How Does the SBA Surety Bond Guarantee Program Work?
For a contract bond to be guaranteed by the SBA, the contractor must meet several requirements. Most importantly, the contractor must meet the SBA’s definition of a small business. The next is that the contractor must have adequate working capital. Finally, the contractor must demonstrate its capability to perform projects.
The SBA program partners with traditional sureties to guarantee bid, payment, and performance bonds for qualified small and emerging contractors. This program gives sureties a solid incentive to approve these bonds when they might not otherwise and allows small and emerging contractors more significant access to federal contracting opportunities.
A traditional surety underwrites the contract bond by reviewing the principal’s personal and business financial statements, as well as their work history and industry experience. Then, the surety assigns a premium rate that reflects the risk of the project. The principal pays a fee for the contract bond (usually a flat percentage of the bond’s penal sum), and the SBA covers 80-90% of the surety’s losses should the project default.